Friday, March 09, 2012

All seems to be calm. Mariano Rajoy announced last week that the Spanish government was relaxing its deficit reduction target for 2012 and....virtually nothing happened. There have been some token noises of disapproval from Brussels but nothing yet which seriously suggests that Rajoy's apparently unilateral move hadn't been quietly agreed with those who are really in control of the Spanish economy. We'll have to wait and see how events develop, but if I was running the show in Brussels and wanted to allow a couple of countries to relax slightly their targets without encouraging everyone else to do the same, then this is probably how it would be done. It even allows Rajoy to pretend to be in charge.

Rajoy's justification for the move was of course the massive overshoot on last year's deficit target. There is understandable suspicion about the 8.5% deficit figure from last year. Much of the responsibility for this lies with the regional governments who, oddly enough, were more or less on target at the end of the third quarter only to veer wildly off it in the final three months of the year. Given that most of these governments are now controlled by the Partido Popular it is suspected that the figures have been manipulated to exaggerate last year's deficit. There are obvious political benefits in doing this. Firstly, it permits the PP to apportion more blame for the deficit onto Zapatero's government whilst at the same time bolstering their case for relaxing this year's target.

Politics is everything with the deficit at the moment. Despite being persistently asked by the EU to present a budget for 2012, the government has managed to defer this until after the Andalucian elections later this month. Then will come the really bad news. If anyone thinks that the pressure is off because of the change to the deficit target then they could not be more wrong. The government still needs to deliver as a minimum another reduction in spending equivalent to that which they already announced at the beginning of the year. These are cutbacks that go way beyond anything that Zapatero's government was required to deliver in order to try and cut the deficit by 2.7% in a single year.

They've changed a completely unattainable target for one that is just simply unlikely. The reason being that once you start making savage cuts to hit a deficit target then the effects of these cuts on tax income and economic activity in general mean that you have to cut even more just to try and hit the same target. This is the full application of what we can call, in a bid to assist future historians investigating the disaster, The Cycle of Stupidity. So in addition to the headline cuts figure to formally meet the reduction target, there will be an extra hit. The total cuts figure in the end could still be close to the €40,000 million that was seen to be necessary to meet the previous deficit target. The overall reduction if last year's budget target had been met would have been less than the one we will still get this year. Even though it's very unlikely to work.

I still see some occasional talk of growth resuming in the last quarter of this year and you have to seriously question the judgement behind this. With the government now accepting the IMF's estimate of a 1.7% decline in the economy, and bearing in mind that these estimates change for the worse every few weeks at the moment, just where is that growth going to come from? It would be nice to think that Rajoy's shift on the budget meant that common sense had finally told, but it seems to be only a tentative step towards dealing with reality. Bear in mind that job losses don't really cease until you get to around 2%+ growth and 6 million unemployed in Spain is now looking inevitable. But not, of course, unavoidable.